Persons who are savvy with personal finance understand that to ensure long-term stability, enjoy their retirement years and grow their current income, it is wise to invest. As such, many become interested in the stock market either on the advice of their financial advisor, or by doing their own personal research into the topic. However, the reality is that though the economy is slowly rebounding, there are many still living paycheck to paycheck. How, then, can one find any surplus funds to begin a foray into marketplace investing?
The most direct route is to borrow money, which can be tricky and deserves its own conversation. For the most part, as long as the funds you borrow (known as leverage) are less than the returns you’re generating, you should be on the upswing. However, it can be all too easy to fall prey to borrowing schemes that leave you upside down on your loan and unable to pay it back. As such, if you’re considering taking out a loan, borrowing from friends or taking an alternate route to get the money to fund your initial investment, it’s important to know what you’re getting into. Here are four ways to borrow and invest successfully.
1. Start with a personal loan.
If you’re going to borrow to invest, one of the most direct and legitimate ways to do so is to take out a personal loan or even a line of credit from your banking institution. This way, you’ll have everything in writing, develop strict payback terms that will be more difficult to deviate away from, and will be more tightly bound to the terms of your loan than if you borrowed from a friend.
Keep in mind, however, that this can also be one of your most expensive options. The main reason is that a personal loan often carries with it high interest rates and other fees that can compound the initial cost. Specifically how much you’ll pay will depend on the amount of the loan you’re taking out, what loan type you get, whether or not you’re putting up any collateral, and your personal credit score.
2. Refinance your mortgage.
There is a chance that you’re paying too much on your current mortgage. If you’re ready to renegotiate your terms, consider refinancing it or even taking out a new mortgage altogether. This is an ideal route to take if you are confident that your investment will be significant enough to either cover your current loan amount or even provide you with a surplus of funds.
However, as with any borrowing plan, keep in mind that when you refinance your home to fund an investment, you could also put yourself at risk of losing what’s at stake. In this case, that means your home. Before you sign on the dotted line, determine whether or not your existing equity is worth losing in the event that an investment goes south, or if you should pursue another option.
3. Invest on margin.
Put simply, investing on margin means that to fund your investment, you actually borrow money from the investing firm or broker directly. While this might be a viable option, it is also one that carries arguably the highest amount of risk.
Initially, this can increase your purchasing power and improve your overall financial leverage. Yet, Murphy’s Law mandates that what goes up must also come down. Remember that while it might be nice to soar at the onset, your losses will only be compounded in the event that the market experiences an overturn and your investments sour.
4. Research private loan options.
Yes, calling up your rich relative and asking for the funds to start an investment portfolio falls into this category. If you have personal friends or family members who are more than willing to help you out in this regard, by all means, this might be an ideal opportunity. However, even when working with someone you know, it’s important to develop strict lending terms, establish any interest rates the other party sees fit, and set a timeline for total payback to be complete.
If you’re in the real estate investment sphere, you may be able to secure a private loan without having to hit up someone you know. In this case, if you do not have someone in mind who can foot the bill, a quick internet search can often yield you the names and information of willing investors who can help fund the investment partially in return for a share of the profit.
A Note of Caution on Borrowing to Invest
Remember, any time you borrow money, whether it is to fund an investment, buy a new home, fix your vehicle or get through that next semester of college, you should only do so if you are confident in your ability to pay the loan back quickly. Even if you have the funds in place to do so, also remember that the amount you pay back will not be equal to the amount you borrowed; it will be more. So, be sure to factor in the interest rate before making your final decision.
To avoid defaulting on your loan, it’s important to invest as smartly as possible, opting for assets that have a proven track record of high performance in the long run. That said, be wary of flash-in-the-pan stocks that haven’t had time to build up integrity just yet. Stick with tried and true performers and once your funds are up, you may have a little more room to accept a higher level of risk. When you’re working with borrowed money and your home, bank account or other high-value entities are on the line, it’s best to play it safe.
